What credit score do I need for a personal loan?

An excellent credit score (a FICO score of 800 or higher) is typically needed for the best personal loan rates. However, minimum credit score requirements vary by lender. According to FICO, the average score is 717. That score falls in the "good" range of 670 to 739, but may not be high enough to qualify with a handful of lenders, such as Citibank and Axos.

To get approved for a personal loan, find a lender that requires a minimum credit score lower than yours and, if possible, take steps to improve your score first.

Minimum credit score requirements for personal loans

Personal loan interest rates by credit score

What makes up a credit score

There are five main factors that make up your FICO credit score.

Payment history

This refers to your history of on-time payments and whether you've made any late payments. Lenders use this history to determine if you're likely to make on-time payments or how likely you are to be late on payments. Payment history makes up 35% of your score and is one of the most important contributing factors.

Amounts owed

Amounts owed is the amount of debt you currently have. This includes:

• Total amount owed
• Credit utilization ratio (or the percentage of credit you have available in revolving accounts like credit cards and lines of credit)
• Number of accounts with balances
• How much you have left to pay on all your loans in comparison to the original amount.

Amounts owed is 30% of your score.

Length of credit history

Your credit history refers to how long your credit accounts have been open. Generally, the older your accounts, the better your score, which is why it's best to keep credit cards open if you can. Once an account is established, it reduces the average length of your credit history, thereby lowering your score, which is why new credit accounts can hurt your score.

In general, it's best not to open a new account after you've just recently opened one. Too many new accounts can also suggest to lenders and creditors that you're not responsible with your credit, and you may be considered a high-risk borrower.

Length of credit history contributes to 15% of your score.

Credit mix

This factor takes into account the different types of credit you have, including:

• Installments loans, such as personal loans, auto loans, and student loans
• Revolving credit, such as credit cards
• Mortgage loans
• Open accounts, like a credit card that requires the full amount due each month, or a collection account

Having multiple different types of credit can improve your score. Credit mix makes up 10% of your score.

New credit

The last factor examines whether you've applied for new credit recently. Most lenders and creditors perform "hard inquiries" when you apply for a loan, including credit cards. These inquiries can knock your credit score, unlike soft inquiries which don't affect it. For instance, if you prequalify for a credit card or a personal loan, the lender will conduct a soft credit inquiry (or credit pull) which won't hurt your score. However, if you decide to apply, the lender will usually conduct a hard pull, which will.

Credit score ranges

Once your credit score is calculated, it'll fall into one of these FICO score ranges:

Factors that affect your eligibility for a personal loan

• Income and employment history: Lenders often look for steady income and employment as an indication that you'll be able to repay your personal loan. If you're self-employed or unemployed, it might be more difficult to get approved.
• Debt-to-income ratio: Your debt-to-income ratio, or DTI, shows the percentage of your gross monthly income that goes toward debt. You can calculate your DTI by dividing your gross monthly income by your minimum monthly debt payments. Lenders generally prefer to see a DTI no higher than 36%.
• Purpose of loan: Most personal loans are flexible, meaning you can use the funds to cover virtually any expense. But sometimes loans come with restrictions and can't be used for certain purposes, like education or gambling.
• Collateral: Secured personal loans require collateral, but they can be easier to qualify for than unsecured loans. Collateral is a valuable asset you own, like a house or a car. While it's easier to get a loan with collateral, the lender may seize your asset if you fail to make your payments.

How a personal loan affects your credit

Many lenders allow you to prequalify for a personal loan and see your offers with a soft credit check that won't affect your credit. But when you officially apply for a loan, you can expect the lender to perform a hard credit check, which can lower your credit score temporarily by a few points. Also know that prequalification is not an offer of credit - you still need to formally apply.

Fortunately, a personal loan can also help your credit over time. As long as you make on-time payments, your score may increase. Additionally, taking out a loan can diversify your credit mix and improve your credit as well.

Can I get a personal loan with poor credit?

If you have a poor credit score (a FICO score below 580), you might still get approved for a personal loan as some lenders have lenient eligibility requirements. Keep in mind that if you do get a loan with bad credit, you'll likely have to settle for a higher interest rate than a borrower with good credit.

Before you sign on the dotted line and commit to a loan with bad credit, do your research. Make sure you're working with a reputable lender and avoid doing business with any company that seems predatory. Predatory lenders typically have exorbitantly high interest rates and fees as well as severe prepayment penalties.

While you can move forward with a personal loan with bad credit, you might want to apply with a cosigner who has good credit, such as your spouse, parent, relative, or close friend. A cosigner can help you land a lower interest rate than you'd get on your own.

How to improve your credit score

• Pay your bills on time: Be sure to pay your mortgage, car loan, student loans, and other bills on time, every time. Even one missed or late payment can lower your credit score.
• Reduce credit card balances: The less you owe on your credit cards, the better. By reducing your credit card balances, you'll lower your credit utilization ratio and in turn, help your credit score.
• Check credit reports for errors: Request free copies of your credit reports from AnnualCreditReport.com. Dispute any errors or inaccuracies you find with the appropriate credit bureau.
• Limit new credit applications: When you open new credit accounts and lenders perform hard inquiries, your credit score will take a hit. Refrain from opening new accounts unless you absolutely need to.
• Become an authorized user: You can be added to another person's credit card account and build your credit score without having to undergo a credit check. If you are an authorized user, you can use the card normally and make regular payments to improve your credit score.

Check out: How to pay off debt fast

Comparing personal loans

As you shop around for a personal loan, be sure to compare the following:

• Annual percentage rate (APR): The APR indicates the annual cost of your loan. A lower rate means you'll pay less. APR is also a better measure of cost than the interest rate alone because it accounts for any upfront loan fees, like origination fees (up to 12%) or administration fees.
• Loan amounts: Loan amounts vary by lender. But in general, you may be able to borrow anywhere from $500 to $100,000 or more. It's usually best to request the loan amount you need and not any more than that.
• Repayment terms: Most lenders offer repayment terms that range from two to seven years. But for certain loans, like home improvement loans, you may be eligible for a term up to 12 years. A shorter term is ideal if you can afford the payment, since it lowers overall interest costs.
• Fees: Some lenders charge fees on personal loans in addition to interest. These include origination fees, late fees, insufficient funds fees, and prepayment penalties.
• Cosigner option: If you have poor credit, applying for a loan with a cosigner can increase your chance of approval or lower the APR you qualify for. Not all lenders accept cosigners, so you'll have to choose one that does.
• Funding time: How long it takes to fund the loan is particularly important if you need an emergency loan. You might be able to find a lender that offers same-day or next-day funding via direct deposit.

How to apply for a personal loan

Once you're ready to apply for a personal loan, follow these steps:

• Compare lenders: Not all lenders are created equal. Do your research and compare the interest rates, loan amounts, repayment terms, fees, cosigner options, and funding times of at least a few different lenders.
• Prequalify with lenders: Before you apply for a loan, get a sense of the rates, terms, and loan amounts you may qualify for by prequalifying with multiple lenders. Most allow you to prequalify, and it won't hurt your credit score. Though it's not an offer of credit, and once you formally apply, your credit score may temporarily dip by a few points.
• Pick a loan option: Choose the best personal loan for your situation. You should get an idea of this once you've prequalified. The key factors to compare are APRs, loan terms, and loan amounts to get the best option for your budget.
• Complete the application: Fill out the formal loan application online or in person. Be prepared to share personal and financial details like your Social Security number, gross monthly income, and employment status. The lender will likely require documentation to support it.
• Get your funds: Some lenders will distribute your funds as fast as same day shortly after you get approved while others may take up to five business days. Direct deposit is usually the fastest way to receive them.

Check out: Best fast personal loans

FAQ

How much can I borrow with a personal loan?

How much you can borrow with a personal loan depends primarily on your credit score, current income, and debt-to-income ratio (DTI), among other factors. It also depends on the loan amounts offered by any particular lender. Some lenders offer loans up to $100,000 or more. Though most offer loans up to $50,000. Be sure to choose a lender that offers the loan amount you need.

How long does it take to get approved for a personal loan?

Approval times for personal loans vary by lender. Some lenders offer instant personal loans or same-day approvals, while others may take up to five business days or more to approve your application. To streamline the approval process, supply any initial and additional documentation the lender requests.

Should I get a secured or unsecured personal loan?

Whether you should get a secured or unsecured personal loan depends on what you can qualify for as well as personal preference. A secured personal loan might be a good idea if you have poor credit and want to increase your chance of approval or get a lower rate. But if you have solid credit, you may be better off with an unsecured personal loan, so you don't have to put an asset on the line.

Read more:

• What is a personal loan?
• How to use a personal loan to pay off credit card debt
• Best personal loan rates
• Best installment loans
• Best installment loans for bad credit
• Best RV loans
• No-credit-check loans